Long-Horizon Investing, Part 3: The Riskiness of "Low-Risk" Assets

Nathan DutzmannAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

This is part three of a five-part series that develops an analytical framework for long-term, retirement-oriented investing. You can read part 1 here and part 2 here. The author would like to thank Joe Tomlinson and Michael Finke for their helpful comments on this article series.

Climbing to the mountaintop: A financial fable

Once upon a time, a solitary figure kept a 1981 New Year’s resolution by ascending a high peak to meet a sage financial guru. “Oh guru,” said he, “in 30 years’ time, I will require exactly $1,000 for reasons conveniently private and personal for the preservation of plausible verisimilitude.”

“Very well,” the sage replied, “I see my St. Bernard has fetched my Wall Street Journal; let me check something… Ah yes, the 30-year Treasury rate this day, conveniently stripped of coupons for the preservation of narrative simplicity, is 13.65%.1 My abacus informs me that you may thus ensure $1,000 in 30 years by purchasing $19.04 of such bonds today.”2

“But master,” moaned the man, “Have I not heard that 30-year Treasurys are highly volatile, as risky as stocks but without the expected return premium? Is there not some way for me to invest more safely?”

The weary guru sighed. “I see you have some learning. But for all your knowledge, you lack wisdom. Still, I have learned through experience the hopelessness of keeping such as you invested in the long-run risk-free asset by ignoring the intermediate swings. Therefore, I merely admit that yes, you may choose to hold short-term Treasurys instead. As you so fervently desire, the dollar amount of your account will never go down.”